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Boe's Paul Tucker Says Banks Must Change

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Commercial banks around the world may be forced to hold larger amounts of high-quality capital and liquid funds to act as a cushion in times of financial crisis, one of the Bank of England’s most senior official suggested yesterday.

Paul Tucker, the Bank’s executive director for markets, also conceded that the experience of the present credit market turmoil meant that it and other central banks may have to overhaul the way that emergency funds are provided to the banking system during periods of financial stress.

The existing system by which central banks provide liquidity to struggling commercial banks in troubled periods “needs to be repaired”, Mr Tucker said at a conference at the London School of Economics.

Setting out what he saw as flaws in the system, he noted that while central banks demand high-quality collateral when lending liquidity to banks, the banks also know that, in times of crisis, these conditions will always be loosened. The result is that they realise that they can hold only lower-quality collateral without fear.

These skewed incentives meant that “it can't continue just as we are at the moment”, he argued.

In comments which echoed a warning by Sir John Gieve, the Bank’s Deputy Governor, last week that commercial banks may face more stringent controls, Mr Tucker added: “Banks must manage liquidity in a different way ... and central banks must look at their arrangements for supplying unlimited liquidity.”

He also conceded that central banks needed to do better in communicating to the markets the nature of and reasons for their actions in the money markets. He argued that there has been confusion about these.

His comments came after the Bank of England faced a sustained barrage of criticism following the eruption of credit turmoil last autumn, with City protests that it was too slow and ineffective in acting to quell market stresses.

“Central banks must do a better job of explaining what the different exercises do and what the objectives are,” Mr Tucker said.

He said that there were two prerequisites for an end to the current financial market turmoil - the stabilisation of the US housing market, and an end to the fear surrounding banks' balance sheets.

Banks must value their books “conservatively”, and recapitalise where necessary, he said, adding that the current difficulties are set to result in “far greater transparency” from the banking sector.

Ouch. when are the due to stabilise ?

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... the current difficulties are set to result in “far greater transparency” from the banking sector.

Yeah right. Just like every change in government is "set to result in 'an end to sleaze and corruption' from the governing party."

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  • 296 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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